Professional Documents
Culture Documents
Biz Org 2008
Biz Org 2008
Agency
a. The Creation of Agency Relationship
i. Introduction
1. Agent a person who by mutual assent acts on behalf of the principal and is
subject to the principals control.
a. Special Agent an agent authorized to conduct only a single transaction
(or a series of transactions not involving continuity of service)
b. General Agent - authorized to conduct a series of transactions involving
a continuity of service where, acting in the usual course of business,
commits acts that are USUAL & NECESSARY.
2. Principal the person for whom the agent acts
a. Disclosed principle At the time of the transaction between the agent
and 3rd person, the 3rd person (1) knows that the agent is acting for a
principal and (2) knows the Ps identity.
b. Partially Disclosed P The 3rd person knows the A is acting for a
principal, but doesnt know the Ps identity
c. Undisclosed P The agent is dealing with the 3rd person purports to be
acting on his own behalf.
3. Agency relationship Exists when (1) the principal manifests the agent shall
act for him, (2) the agent accepts the undertaking, and (3) the understanding of
the parties is that the principal is to be in control of the undertaking
a. Agreement need not be a formal or written K (consideration not
required)
b. Control doesnt have to actually exercised, but simply that the P has the
power to control the A.
c. Test is the substance of the relationship, intent is only a factor.
d. Three Elements of an Agency Relationship:
i. Mutual agreement
ii. A must be acting on behalf of the P
iii. A must act subject to the Ps control
4. Agency Law governs the relationships between:
a. Agents and Principals
b. Agents & Third Persons with whom an agent deals, or purposrts to deal,
on a Ps behalf
c. Ps and third persons when an agent deals, or purports to deal, with a 3rd
P on the Ps behalf.
5. Restatement of Agency (2nd) will be considered our law for this course as
most cases still deal with the 2nd.
ii. Agency v. Gratuitous Bailment
1. Gorton v. Doty
a. Facts: Coach was agent of appellant teacher; control was present.
b. Issue: Was there enough control to have agency relationship in
existence?
i. Agent acts on Ps behalf and is subject to his control for his
benefit. The right to control is enough.
ii. Court is focusing on the control element of agency test
c. RAG: Courts mistake; not for the benefit of; P is not liable for the detail
of the work under his control the coach was merely a IC of teacher, not
agent. Court was clearly wrong.
i. P is only liable for the torts of agent if agent is servant or
employee. This case is completely wrong, no control and no
benefit.
iii. Agency v. Creditor-Debtor Relationship
1.
3.
4.
5.
c.
b. Whether he had any losses or not A would still have to pay for breach
of fid-duty
3. Rule: All profits made by an agent in the course of an agency belong to the P,
whether they are the fruits of performance or of a violation of an agents duty.
4. Standard: An agent is a fiduciary, a person who is required to act for the benefit
of another person on all matters within the scope of their relationship.
a. An agent has 2 fid-duties to a P:
i. Loyalty to act in the best interests of P
ii. Care to perform tasks of P with all reasonable care
iii. Obedience Subject to Ps control
5. Holding: As part of these fid-duties, all profits earned by an A during the course
of agency, whether in/outside scope of business, or with or without authority,
belong to the P regardless if the transaction was profitable or if the P suffered no
damages.
a. P and A are free to contract for As commission; anything else belongs to
the P
b. Rationale precludes having to investigate nature of As loyalty
6. Standard: A is liable where he acts without authority (breach of warranty)
a. If P revokes actual authority, A may still be liable to P for damages
where apparent but not actual authority exists. This rule with inherent is
unsettled.
d. The Principals Duties to the Agent
i. McCollum v. Clothier
1. Facts: McCollum brought action against Clothier to recover under implied K for
services rendered by P in securing bidders on and buyers of machinery and
equipment sold for benefit of D at sheriffs sale after foreclosure.
2. Holding: A Principal must pay for the reasonable value of his services plus
expenses, there is an implied contract.
3. Standard: If A has acted within actual authority, P has a duty to indemnify for
payments that were authorized or made necessary in executing affairs.
e. Imputing an Agents Knowledge to the Principal
i. Standard: 282(1) A P is not affected by the knowledge of an agent in a transaction in
which the agent secretly is acting adversely to the P and entirely for his own or anothers
purpose, unless:
1. The failure of the A to act upon or to reveal the information results in a violation
by the P of a contractual or relational duty;
2. The A entered into negotiations within the scope of his powers and the person
with whom he deals reasonably believes him to be authorized to conduct the
transaction; OR
3. Before he has changed his position, the P knowingly retains a benefit through
the act of the agent which otherwise he would not have received.
ii. Cenco v. Seidman & Seidman
1. Facts: SH brought class against the corporation and auditors, alleged violations
of securities fraud.
2. Issue: Whether Cenco is liable for fraud planned by its managers?
3. Holding: A company is deemed to know what its agents know (unless the agents
were acting adversely to the company) Here, there is no adversity of interest, so
Cenco is deemed to be knowledgeable.
a. Mixed motives even when A acting in self-interest, must be entirely for
own benefit to be acting adverse to the company
b. Open issue what about knowledge of lower-level employees?
i. 3 Rest 5.03 So long as A is acting within the scope of his
employment, P is bound by his knowledge.
f. Termination of the Agency Relationship
II.
i. Standard: The P always has the power to terminate, but based on what the contract says,
he may or may not have the right to do so. Its a power/right distinction. Even if he
breaches the contract, as long as damages are paid.
ii. Hunt v. Rousmaniers Administrators
1. Facts: R was lent money and as security executed power of attorney on two
ships which gave the lender power to make and execute a bill of sale
2. Issue: Does the power of attorney retain efficacy after death? (No)
3. Rule: A power of attorney ceases w/life of person giving it, except:
a. If a power is coupled with an interest it survives the person giving
it, and may be executed after his death.
b. The interest be in the thing itself (title to item, not proceeds)
4. Holding: Exception doesnt apply here, not coupled with an interest.
a. When coupled w/interest, no longer acting as A, but now as P
5. To avoid confusion 3R uses termination of powers given as security
The Partnership
a. Formation
i. Partnership an association of two or more persons to carry on as co-owners a business
for profit. See UPA 6, RUPA 101(6)
1. For purposes of our class, RUPA will be considered the law. 1992- but all pship analysis will start with UPA since this was the law when these cases were
being decided.
ii. Rules for determining existence of a P-ship. Does the relationship evidence an
agreement to be partners?? When no express P-ship agreement exists, a relationship
will only be considered a P-ship if four elements are present - See UPA 7:
1. Agreement to share profits is prima face evidence of P-ship, but inference
disappears where profits received in payment as a debt by installments or
otherwise
2. Agreement to share losses
3. Mutual right of control or management of the business
4. Community of interests (rarely used, no one knows what that means!)
iii. The four-element tests departs from RUPA 202(a) which simply says, Except as
otherwise provided in subsection (b), the association of two or more persons to carry on
as co-owners a business for profit forms a P-ship, whether or not the persons intended to
form a partnership.
1. RUPA 202(c)(3): A person who receives a share of the profits of a business is
presumed to be a P in the business, unless the profits were received in payment
of debt by installments or otherwise.
iv. Exam Analysis: Always look to see whether the group is actually a partnership.
v. Partnership v. Creditor-Debtor Relationship
1. Martin v. Peyton
a. Facts: A banking partnership was in financial difficulties, so they
entered into an agreement with a few individuals to loan them liquid
securities to get more cash. In compensation for the loan, they were to
receive 40% of the profits of the firm until the loan was paid off and the
return was made.
i. The men did not believe they were b/c partners, but rather just
lenders. However, intent doesnt matter, but rather the
nature of the relationship.
b. Issue: Whether they are partners and whether they operated as coowners of a business for profit? The Court looks to the key provisions of
the loan agreement for answers.
i. Share Profits
1. Yes even if reason is repayment of loan
2. No there was a ceiling on the amount that would be
shared, so they were not true business partners
ii. Sharing Losses
1.
2.
iii. Control
1. Yes veto power
2. No only had negative power and could not suggest
business ideas.
c. Holding: The court says there was no affirmative control here veto
power alone doesnt give them enough control to consider them partners.
They also didnt have affirmative control to bind the company to any
transaction or make the company do something
i. However, RAG thinks the better reason was there was no
intent to be partners in this situation.
d. Standard: Test for whether a P-ship has been formed is based on
whether the parties intended to have the kind of relationship which the
law characterizes as a p-ship, not whether the parties thought they were
actually partners.
i. Court will give some weight to the parties intent
ii. Informal creation is a unique aspect compared to other
business entities
e. Standard: Powers that investors have such as seeing books, the right to
be consulted on big decisions, veto power, and even the right to make
other Ps resign & b/c Ps themselves is not sufficient for them to be
considered a P. They do not have the right to control day-to-day business
of P-ship.
vi. Partnership v. Employment Relationship
1. Standard: Firing a partner for the purpose of keeping the business or profits to
oneself is a breach of fid-duty.
2. Beckman v. Farmer
a. Facts: Three Ls had joint practice and received large settlement fee after
Farmer left.
b. Issue: Was the joint practice a partnership?
c. Factors that pointed to the existed of a P-ship:
i. Sharing profits
ii. Sharing losses Beckman guarantees all loans
iii. Control Beckman included Farmer on some decisions, but
unilaterally fired Farmers secretary
iv. Agreement yes, firm name, taxes, and lease
vii. Partnership v. Independent Contractor Relationship
1. Zieglar v. Dahl
a. Facts: Several men create ice fishing service. They hired 2 other men
and extended a P-ship proposal but never signed.
b. Issue: Were Zieglar and Kirsh partners?
c. Holding: They failed to satisfy the element s of intent and co-ownership
required to form a P-ship.
d. Standard: To form a P-ship, three elements must be satisfied: intent, coownership, and profit motive. Adds in intent.
2. RUPA 202 adds to definition whether or not the person INTENDS to form a
P-ship Did they intend to be co-owners of a business?
viii. Partnership by Estoppel
1. Standard: RUPA 308 if a person purports to be a partner, or consents to being
represented by another as a partner, and a 3rd party relies on that representation,
the person is liable to the 3rd party.
a. If the representation is public, the person is liable even though he is
unaware of the representation of the claimant,
2.
c.
1.
6.
7.
8.
9.
ii. Issue: Is T liable individually for the full amount of the Pships debt? (yes)
iii. Holding: Under the Exhaustion Rule, a P-ship creditor
must first exhaust P-ship assets before pursuing individual
assets of the other Ps. WSC did this, therefore T is
individually liable for debt.
iv. To establish individual liability prove a separate K; or
prove the P assets have been exhausted. RUPA gives
creditors joint & several liable but also has exhaustion that
UPA doesnt have, b/c aggregate theory.
10. Indemnity & Contribution Standard: if a P pays a p-ship obligation, he is
entitled to be indemnified by the P-ship UPA 18(b); RUPA 401c
a. If the P-ship unable to pay, the other Ps must pay according to their
loss-shares
d. Ownership Interests & Transferability
i. Partnership Property
1. RUPA Standard: A partnership is its own entity. See RUPA 201(a). Property
acquired by a partnership is the property of the P-ship and not of the partners
individually. See RUPA 203.
2. UPA Standard: Under UPA 8(3), which reflects the aggregate theory, the Pship cant own its property directly. Although 8(3), real estate MAY be acquired
in the P-ships name.
a. A P-ship cannot use the P-ship property for non-partnership purposes
b. Cannot assign interests in p-ship property
3. Standard: Although a partnership interest is assignable, a p cant make an
assignment of his P-ship interest that would sub the transferee as a P in the
transferors place, b/c no person can be a P without the consent of the rest of the
Ps.
4. Standard: RUPA 204(a) Property belongs to the P-ship is acquired in the
name of the P-ship or one or more partner with an indication in the instrument
transferring title of the existence of a P-ship.
5. Standard: RUPA 501 A partner is not a co-worker of a P-ship property and has
no interest in P-ship property which can be transferred.
6. Conveyance
a. Standard: RUPA 301 Partnership property may be transferred by a
partner in the P-ship name if:
i. The title in the P-ship name if they have authority under S303;
ii. By the partner in his name if the property is held in that name
and indication of P-ship
iii. By the partner in his name if property is held in his name
1. Theres no limitation to real property like in UPA
b. Standard: UPA 10 Title to P-ship property may be conveyed by:
i. Either partner in the P-ship name when title in the P-ship name
ii. Either partner in his own name where title in the P-ship name
and authority under 9.1;
iii. A partner in his own name where the property is in that name;
iv. A partner in his name of P-ship name when P-ship not just in
his name and has authority under 91 and passes equitable
interest.
7. Kay v. Gitomer
a. Facts: Tenants in partnership (couple). K sold lot by K & E w/o Es
consent.
b. Issue: Was the lot owned by Kay and E as tenants in pp? (yes, intent to
use property as cap contrib. for pp) Did the K of sale, signed by only K,
bind the p-ship?
c. Holding: K had actual authority to sign the K for the p-ship.
d. Gitomer has an equitable interest under UPA 10(4). This is sloppy b/c
not good as legal title which will prevail. RUPA is better and all transfers
will count and there is no distinction b/t legal & equitable time.
ii. Admitting New Partners v. Assigning Partnership Interests
1. Standard: RUPA 401(i) A person may become a partner only with the consent
of all the other partners.
a. Courts are reluctant to enforce a contract around this rule unless intent of
the parties is clear.
b. The assignee of a P-ship interest doesnt b/c a P, has no right to
information. However, as long as P-ship continues, the assignee has a
right to P-ship distributions and on dissolution a right to receive the
assigning Ps interest.
2. Standard: RUPA 502 the only transferable interest of a P is the Ps share of the
profits and losses of the P-ship and receive distributions personal property
interest.
3. Standard: RUPA 801(a) provides that a transferee of a Ps transferable
interest is entitled to judicial dissolution of the P-ship
a. At any time in a P-ship at will; AND
b. After expiration of the Ps term or the completion of the undertaking in a
P-ship for a particular undertaking
4. Rapoport v. 55 Perry
a. Facts: Two families owned 50% each of a P-ship. Later the Rs assigned
a 10% interest out of their share to the adult children. Other Ps refused
to recognize the children as new partners.
i. Here, the parents can assign interest to kids w/o consent but
cant make kids Ps w/o unanimous consent.
b. Rule: It takes unanimous consent to make a new partner unless there is a
prior agreement. RUPA 503:
c. Standard: A partner has a property right in his interest in the partnership
and can assign his interest in profits and losses and the right to receive
distributions. RUPA 502
1. The right to participate in management though, is the
property of the partnership itself.
2. An assignee may be made without consent, but he is
only entitled to receive the profits of the assigning
partner.
iii. The Rights of Partners Creditors
1. Standard: You can freely assign partnership interests, but you cant assign to a
person your status as a partner. This means that Ps can use their interest to
secure a debt to creditors but the assigning P will remain a P.
2. Hellman v. Anderson
a. Facts: F/c sale of Andersons interest in the P-ship.
b. Holding: A debtors interest in p-ship may be f/ced upon & sold, even
though other Ps dont consent to sale, provided the f/c doesnt unduly
interfere with the p-ship biz.
c. Standard Seizure of a Partners Property: (UPA 28(2) & RUPA
504(b))
i. Step #1- Judgment
ii. Step # 2 - Creditor achieves a charging order which is a
lien on the judgment debtors transferable interest in the Pship.
1. Gives creditor a right to be paid in distributions
2. But, b/c P-ship doesnt have to make distributions, of
little use
3. Debtor partner retains the rights of management,
ordinary & extraordinary votes
Fiduciary Duties
i. The Common Law
1. Meinhard v. Salmon
a. Facts: M cuts S out of a deal on a new lease agreement. Salmon
effectively stole an opportunity for greater investment from Meinhard,
who was his partner. Once the lease was over, Salmon pursued a
redevelopment plan that was offered to him while they were still in a Pship together. Ps owe each other the duty of the finest loyalty. A
trustee is held to something stricter than the morals of the
marketplace. Not honesty alone but the punctilio of an honor the
most sensitive.
b. Standard: While partners are not true fiduciaries, their relationship
entails several fid-duties which cant be changed by contract. They must
not usurp business opportunities belong to the partnership from your
partner .See RUPA 103(b)
i. Duty of Loyalty cannot steal business from one another.
This reduces the risk of doing business, but also undermines
efficiency.
ii. Duty of Care
iii. Duty to Inform each other of material facts. UPA 20
c. Compared to UPA, RUPA 404 (b) limits fid-duties of a partner to
loyalty and care and explicitly provides that acting in own interest is not
a violation.
i. RUPA 404(e) A partner doesnt violate their duties to the
P-ship just b/c their conduct furthers their own interests
ii. RUPA 103(b)(3) The duty of loyalty is mandatory and it
cant be contracted away via a written P-ship agreement, but
the P-ship agreement CAN define reasonable standards of
what constitutes loyalty.
d. Suits by Ps against P-ship have been limited to suits for an accounting
UPA 22, or for dissolution as a result of language in UPA 13.RUPA
305 permits suits by Ps against P-ship in tort or any other theory
e. Policy Reason: Due to the level of intimacy and economic vulnerability,
partners would be able to take advantage of one another. This rule
protects minority partners against majority oppression. But, as dissent
writes, is this overly broad?
ii. Codification of Fiduciary Duty and Contractual Waiver
1.
2.
3.
f.
Dissolution
i. UPA: Aggregate Theory: Dissolution results when any partner leaves the P-ship UPA
29.
1. Majority Dissolution cant be prevented by agreement. For example,
agreement that expulsion of a P will not result in dissolution.
ii. Dissolution a change in the relation of Ps caused by any P ceasing to be associated in
the carrying on (as distinguished from winding up) of the business
1. Rightful dissolution UPA 31(1)
a. By the termination of the definite term of agreement
b. By the express will of any P when no term is specified (At will P-Ship)
c. By the express will of all Ps who have not assigned their interest either
before or after specified term
d. By expulsion of any P from the business bona fide under the power
conferred by agreement
e. By any event which makes it unlawful for the business to be carried on
f. Death of any partner
g. Bankruptcy of any P or the P-ship
h. Decree of court under 31(5) UPA
iii. Events Causing Dissolution
1. Page v. Page
a. Standard: P-ships are terminable at-will UPA 31.1.b
b. Facts: Bros. had P-ship in linen supply biz & as soon as they made a
profit, 1 bro wanted to dissolve the P-ship.
c. Issue: Whether the P-ship was at-will or a term P-ship?
d. Holding: Court determines this was not a P-ship by term. What they
claim was a term, was no more than a hope P-ship earnings would pay
for all necessary expenses. Default is at-will.
i. UPA 31(1)(b) dissolution of the P-ship occurs by the express
will of any p where there is no fixed term.
1.
c.
Rule: There are substantial penalties for one who wrongfully dissolves.
38 UPA
i. Liability to other partners for damages for breach of
agreement
ii. Valuation of interest in P-ship discounted for goodwill
iii. Remaining Ps have right to continue business or liquidate,
regardless of desires of departing P
d. RUPA 701(b) is different wrongfully dissociating partners get a
buyout price that represent the greater of the going concern or
liquidation value at the time of dissociation. Goodwill is rejected!
2. The Expulsion of a Partner
a. Expulsion of a Partner without good cause is wrongful dissolution 31d
b. A p-ship agreement may lawfully provide for the expulsion of a partner
without cause. 31d
c. Expulsion cannot be in bad faith to prevent a P from exercising rights
under agreement
3. Winding up 30: A dissolution commences with the winding up of a P-ship
a. Period after dissolution but before termination when P-ship finalizes
affairs
i. After dissolution, assets are sold, liabilities of the P-ship paid
in this order. See UPA 40
1. Non-P creditors
2. P Creditors
3. P in respect to capital contributions
4. Distribution of remaining profits
4. Termination completion of the winding up process and end of the p-ship as a
going concern.
a. 40 d if the P-ship assets are insufficient to satisfy the P-ships
liabilities, the P-ship must contribute according to their loss shares
(relative to profit shares)
5. UPA 33 Dissolution terminates all authority of the Ps to act for the P-ship
except:
a. To wind up the P-ships affairs
b. When the dissolution is by bankruptcy or death of a partner, if no
knowledge of the dissolution 34
c. With respect to 3rd parties (apparent authority - 35)
6. Rights to the P-ship Property UPA 38
a. Partners can agree by unanimous consent not to liquidate the business
upon dissolution, unless the dissolution is against the P-ship agreement
b. A partner, who has not breached the P-ship agreement is entitled to wind
up the P-ship and force liquidation, and to receive his portion of the
proceeds in cash
7. A successor P-ship succeeds to the liabilities of its predecessor 41-1
a. 17 a new partners liability for P-ship obligations incurred before his
admission may be satisfied only out of P-ship property
vii. RUPA: Partner Dissociation
1. Entity theory: A P-ship is an entity distinct from its partners 201
2. Certain events will lead to dissociation. See RUPA 601
a. A P has the power to dissociate, rightfully or wrongfully, by express
will.
b. A partner becomes dissociated when:
i. The P-ship has notice of the Ps express will with withdraw
602 wrongful/rightful
ii. An event agreed to in K occurs
3.
4.
5.
III.
The Corporation
a. Introduction
i. Comparing the Partnership and the Corporation
1. Limited Liability
a. Shareholders (SH) cant be held personally liable on corporate
obligations
b. In P-ships, individual Ps can be held personally liable
2. Free transferability of ownership interests (creating new members)
a. Ownership interests shares of stock, freely transferable
b. P-ship requires unanimous vote (UPA 18g) to add new Ps
3. Terms of Existence
a. Corporation is perpetual it exists until it is dissolved (which requires
formal procedures)
b. Whereas, P-ship can be dissolved at will
4. Leadership
a. Corporations have centralized management under the discretion of the
board of directors (BD)
b. Whereas in a P-ship, everyone participates
5. Formation
a. Corporations are NEVER formed by accident you must choose where
and what state to incorporate
b. P-ships can be formed wherever the arrangement conforms with the
laws view of P-ships
b. Formation
i. Incorporation and its Aftermath
1. Internal Affairs Doctrine Law of the state where a corporation (C)
incorporates is the law that governs all the internal affairs of C.
a. Small Cs (closely held Cs) are likely to incorporate where they do the
majority of their business b/c of the overlap in franchise & doing
business tax
b. Large Cs are unaffected by the franchise tax & incorporate in state that
has most manager-friendly laws
2. Delaware (DEL) is by far, the most successful state in attracting incorporation of
publicly held Cs b/c it has the most manager-friendly laws in the country.
a. Policy evaluation to understand reasons for DELs success:
i. Race to the Bottom Theory
1.
a.
4.
5.
6.
7.
Model Act 2.02 all those who assume to act for the C are liable ,
which means managing SH are liable while passive ones retain limited
liability
b. General trend eliminates liability for those who dont actively participate
in the management of the business.
Standard: C by Estoppel is an amalgam of three theories those purporting to
act for the C have represented to a 3rd party that the C has been lawfully formed.
Then the party changes position/relies to their detriment. Three Branches of
Corporate Estoppel:
a. Branch #1 Real Estoppel C cant get out of the deal after making a
representation to a 3rd party
b. Branch #2 Technical Estoppel A 3rd party cant get out of a deal on
the theory that the C didnt really exist b/c he achieved the results he
bargained for (this is more corporate law, not estoppel)
c. Branch #3 The 3rd party cant sue the promoter to hold him personally
liable (also corporate, not true estoppel)
i. Liability of Would-be SH is protected as if it were a de jure C
ii. As a matter of equity, the 3rd party, having dealt with the
enterprise as if it were a corporation is estopped from
treating it as anything else.
Modern Acceptance of Doctrines:
a. DEL Standard: First two branches of estoppel doctrine are codified in
DE 329. Neither a C or 3rd party sued by a C can assert the defense of
Estoppel
i. 3rd branch has been accepted as a matter of CL
ii. De facto doctrine exists
b. Model Act States Standard: Accepts two branches of Estoppel, but
SH/Promoter are not protected from liability, however:
i. Exception: MA 2.04 provides limited liability for SH who
didnt know it hadnt been incorporated
ii. Otherwise, those who purported to act on behalf of the C and
who knew there was no incorporation are jointly & severely
liable.
iii. Also, they do not accept de facto incorporation, You are
only a C once the COI is issued by the SOS and once it is
issued, you are a C, regardless of any clerical error
1. No opportunity to assert questions about a Cs
existence b/c filing is conclusive proof that
incorporation was proper. MA 2.03
2. Under DEL law, filing is only prima facie evidence;
de facto C is therefore a permissible defense. See DE
106
Cantor v. Sunshine Greenery, Inc.
a. Facts: B, on b/h of SG entered into a lease with C on Dec. 16th.
However, the corp. was officially filed with SOS until Dec. 18th. B never
paid for this lease.
b. Issue: Was there a de facto corp. in existence at the time of lease
agreement? (yes) Can C impose liability individually on B as a
promoter? (no)
c. Holding: SG was a de facto corp. and therefore, C is estopped from
imposing liability on B personally. See elements above.
Robertson v. Levy
a. Facts: L was to buy Rs biz & executed a bill of sale on 1/8, but the cert.
of incorp. wasnt filed until 1/17. R sues L on the loan that defaulted &
expenses for the lease.
b. Issue: Is the president (L) personally liable on the obligation entered into
with R before the COI was issued? (yes)
i. Is R estopped from denying the existence of the corp. b/c he
accepted a first installment pymnt on the note? (no)
c. Standard: Before the COI, the individuals who act as a corp. w/o
authority are Joint & Severable liable for all debts/liabilities incurred;
after the COI is issued, only the corp. can be liable.
d. Holding: Therefore, L is held personally liable b/c he acted on b/h of the
corp before the COI was issued.
i. The court here follows Model Act (TX), DEL is a CL jx
(Sunshine) in which estoppel is recognized.
vi. The Ultra Vires Doctrine
1. Ultra Vires are transactions outside the sphere of activities in which the C can
engage.
a. A remnant of the 19th century, where the states job was to keep
corporations within the limit of the purposes for which they were former.
b. Today, UV only an issue when conduct doesnt benefit the corp. in any
matter.
2. Classical Doctrine
a. B/c a C exists only within its charter, any transactions other than those
which seek to maximize SHs economic wealth are UV (like donations
to charity, etc.)
i. Example: Train company was not authorized to build railroads
so all contracts on that matter are void.
3. DEL Standard: Cs are authorized to make donations for public welfare or
charitable, scientific, or educational purposes as well as to enter into transactions
that help the government. See DE 122 (9) DEL practically abolishes any notion
of the UV doctrine.
a. Some states, like Connecticut, provide that a C may consider other
constituencies, such as the community, when making determinations of
the Cs best interest.
b. DEL hinted at such a power in Unical, but subsequently limited such
considerations to requiring a rationally related benefit to SH in
Revlon.
4. However, 124 a corporation is not allowed to use UV nature of its action to
escape an obligation under a K.
5. Modern Doctrine: Goodman v. Ladd Estate
a. Facts: SH of Westover seek to enjoin Ws reimbursement to Ladd for
guaranteeing a BDs loan. Westover was in the business of selling
mortgage insurance but the loan they guaranteed to W was for his
personal use.
b. Issue: Are the SHs entitled to equitable relief? (no)
c. Holding: The agreement is enforceable even though UV, and they cant
get relief b/c the SH which they bought shares is the person who
procured the note to begin with. (Tainted Shares)
d. Rule: The classic UV doctrine has been severely limited by state law;
b/c a company can be formed for any lawful purpose the only
activities that are UV are those with NO CORPORATE PURPOSE.
DE 102
i. General powers of officers, directors, and SH limited to
powers & privileges necessary or convenient to the conduct of
business purpose set forth in certificate of incorporation. See
DEL 121
ii. A corporation can guarantee debts, make donations for public
welfare, lend $ for corporate purposes. 122
c.
a.
3.
b. Cumulative Voting: a SH can cast for any single candidate, or for two
or more candidates, as he chooses, a number of votes equal to his
number of shares he holds times the number of directors to be elected.
i. Results in reasonably proportionate board rep
ii. Benefit provides the min SH with access to happenings at
directors meetings and access to company information via the
directors rights
1. Enables min to avoid result where board acts, without
a meeting, by unanimous written consent 141(f)
3. Voting Out A Director
a. Math formula for determining number of shares needed to elect a
director
i. Min number of shares needed to elect a particular number of
directors
1. X =((s*n)/(d+1))+1
a. X = Min # shares needed
b. S = total # shares that will be voted at
meeting
c. N = # of Ds desired to be elected
d. D = total # D to be elected]
ii. Legal importance of formula: you cant remove a director
without causeif the number of votes cast against his removal
would have been sufficient to elect him 141(k)
iii. Max number of directors that can be elected by a group
controlling a particular number of shares
a. N = x*(d+1))/s
4. Informational Rights See 220
a. Skouras v. Admiralty Enterprises
i. Facts: S wants access to the records b/c he claims there is
mismanagement by the BD & claims SD by giving themselves
too many perks.
ii. Rule: SH has a right to see records in DEL if he proves he has
a proper purpose. Investigation of mismanagement would be a
proper purpose, but you have to have some evidence of it b/f
you see books.
1. Proper purpose: purpose which is reasonably
related to such persons interest as a SH
iii. 220(b)(2) says he gets the records of the parent company and
any subsidiary if they are relevant.
d. Altering Corporate Norms by Corporate
i. Voting Agreements See 141, 151, 212, 218
1. Ringling Bros.-Barnum & Bailey v. Ringling
a. Facts: 3 SH: 2 min SH agreed theyd vote together (each owned 350
shares) and North owns 370 shares and if theyd disagreed, theyd go to
an arbitrator and agreed theyd vote as he decides.
b. Issue: Was either party empowered to the As decision? (no)
c. Rule: A voting agreement which enables SH to name each other
directors and take a majority of the board is not illegal
i. Codified by DE 218(c) which requires that such agreements
be in writing an designed by the parties thereto
ii. While voting agreements are generally held to be valid, such
will be deemed invalid if based on a private benefit such as a
side payment (vote selling is illegal)
d. Rule: Voting agreements are problematic b/c they require court
enforcement and the court doesnt always fix the problem
a.
Facts: McQuade, a min SH , is angry b/c the majority fired him from his
directorship and officer against an agreement b/t McQuade, Stoneham,
and McGraw all SH in NY Giants. Their agreement said that Stoneham
(who had most shares) would vote for the other 2 as directors plus three
others.
b. Issue: Is the agreement to put McQuade on the board valid?
c. Rule: An agreement among SH to make each other officers is illegal in
so far as it abrogates the directors duty to use their independent
judgment
i. DE 141(a) it is the job of the board to manage the affairs of
the company, and SH cant tell the board who is an officer
ii. DE 218 (c) permits SH to agree to their agreement
d. Issue: But can SH agree to make McQuade an officer by way of agreed
upon vote?
i. No, they would be hamstringing themselves as BDM on the
issue, b/c their duty is to the corporation
ii. If the contract WERE enforceable, that would be unfair to
minority SH who are entitled to assume the directors were
running corporation in the Cs best interest, not McQuades.
e. In actuality, however, its not so hard to create an agreement among SH
which constraints the BDs ability to fire officers
i. Option #1 amend the COI to have classified stock
ii. Option #2 amend the COI to require unanimous board
approval to fire an officer per 141(b)
iii. Option #3 amend the COI per 344 to b/c a statutory CHC
which, per 350 is permitted to have a written agreement
among SH which impinges on the discretion of the directors
1. In so far as 141a enables restrictions to be placed on
directors in the COI (which can be made by simple
majority) this seems to enable a work-around.
f. If everybody who was a Giants SH voted to restrict the boards conduct,
that would be ok b/c no minority is disadvantaged
i. 350: a written agreement b/t SH is not invalid b/c it relates to
the conduct of the business such that it restricts or interferes
with the power of the board.
2. Clark v. Dodge
a. Rule: Another NY case which upholds a SH agreement which seemingly
impinges on the power of the BD by requiring that Dodge, majority SH
and director continue Clark in his role as general manager.
i. But, in Long Park the same court invalidated a SH agreement
which provided the management of all theaters leased or
operated by Trenton or any other sub is vested in SH
agreement without approval of directors, and this management
may not be changed by the directors but only provided in
section 4
1. Long Park represents the DE rules in so far as the
Court is loath to approve a SH agreement which
sterilizes the BD in violation of 141a
iii. Supermajority Quorum and Voting Requirements See 109, 141(b), 216, 242
1. Standard: Supermajority quorum and voting requirements (up to and including
unanimity) are legal at the board 141b and SH levels 216
2. Frankino v. Gleason
a. Facts: F wants to regain control of the board, even though he already
has 55%. But bylaws say there will be 6 directors, and article 9 says that
80% vote is required to change the bylaws.
a.
e.
c.
a.
Facts: PRE and M Properties are partners. P-ship sued for breach of K.
PRE settles the claim, and they seek contribution for MPI and M
personally M is the sole SH.
i. They split the profits 50/50 so liability is the same
ii. PRE wants to pierce the CV to get to M personally. He was
siphoning off money of the C, he didnt follow formalities,
and he did not pay dividends.
b. Holding: Court says that despite all of that, theres no evidence that he
has used the corporation to disguise any wrongs.
i. Fraudulent transfer: take money out without reasonable
consideration, and there is not enough money to settle possible
future obligations.
c. Without proof of fraudulent transfer (no records), there is no reason to
go beyond the parties in the agreement that MP, not M would indemnify
PRE. The limited liability was a bargained-for part of the K.
i. They COULD have agreed to make him personally liable, they
didnt.
d. Standard: Dont pierce veil here b/c it is a K case, not tort. (tort victims
dont have ability to bargain) Courts will rarely pierce the corporate veil
in a contract case.
i. Considerations sophistications of the parties, capacity to
investigate the credit of the C or SH.
e. Courts are split some say cant pierce unless proof of actual fraud
(TX), others treat K cases same as tort. Middle ground is above case in
Virginia.
iv. Parent-Subsidiary Cases
1. Standard: It is much more difficult to pierce the veil in order to hold the parent
C liable for the debts of a wholly owned subsidiary.
a. Where the parent company is not running the day-to-day business and
otherwise observing proper parent company etiquette, the creditors
should have been on notice as to the liability of the party it was dealing
with.
b. How was much CONTROL does parent exercise???
2. Standard: Where a parent company takes over the operations of a subsidiary,
that parent company is liable for its own misconduct
a. Natural first question is the parent liable for anything it did personally
wrong?
3. Presumption that D/O holding positions with a parent and subsidiary change
hats to represent 2 corp. separate despite common ownership.
v. Equitable Subordination
1. Standard: when a C is in bankruptcy, debt claims that a controlling SH has
against the C may be subordinated to the claims of other persons, including the
claims of preferred SH, on various equitable grounds.
a. Another remedy is to redress improper conduct, but only appropriate
where sins are of a lesser order of magnitude
i. SH only loses out on investment if it has already made as
opposed to veil piercing where liability exceeds investment
ii. Requires a lesser showing of misuses of the corporate form;
thus, undercapitalization alone may result in equitable
subordination: BOP seeking subordination
iii. A lesser remedy than fraudulent transfer where penalty is to
avoid the transfer.
2. Costello v. Fazio
a. Facts: 3 partners create P-ship, they decide to incorporate2 of the
partners pulled out all of their capital contribution except for 2K each.
So they pulled out 45K from P-ship, leaving it undercapitalized.
f.
b. Fraudulent transfer? They dont have consideration, and they are not
likely to be able to settle obligations with $6k. They are losing money.
No problem of proof, we know amount taken out.
i. They knew company was failing in anticipation of
incorporation, they stripped the company of all its capital, to
the detriment of the C and its creditors, for their own personal
gain.
ii. They should not get paid before other creditors.
c. Holding: Unfair to pierce the veil here b/c they put the money back into
the corporation. They never took money out of company, but they took
their capital out and made it a loan, which is wrong, but they put it back.
d. PV would be overkill. Equitable subordination is proper; other creditors
debts will be settled b/f their promissory notes.
The Traditional Role of Fiduciary Duty
i. The Duty of Care and the Business Judgment Rule
1. Standard: Directors always have a fid-duty of loyalty & care to SH. Unlike
partners, directors are true fids and must act for corp. selflessly.
a. There is no duty to creditors unless insolvent or there is a special trust
relationship if corp. is acting like a bank, etc.
2. The Oversight Context
a. Francis v. United Jersey Bank
i. Facts: Mother and 2 sons are directors of re-insurance
brokerage which did not keep separate accounts & sons began
taking loans from Cs treasury. Loans left C w/out $ and
mother did little as director.
ii. Issue: Whether the mother can be personally liable for a
breach of fid-duty by letting her sons steal $ from C?
iii. Standard: Breach of duty of care requires a finding that she
had a duty to clients, that she breached duty, and that the
breach was proximate cause of their losses.
1. Duty directors always have duty to SH
2. Breach all directors are responsible for managing
the business & affairs of C, as she never did anything,
duty was breached
3. Causation Must determine reasonable steps a D
should have taken & whether that course of action
would have averted a loss.
a. Act or failure to act must be a sub factor in
producing harm.
b. Here, court finds her actions contribute to
corruption.
c. Where it is reasonable to conclude failure to
act would produce a particular result &
result has followed, causation may be
inferred.
4. Standard: General obligations of a director include
understanding the business, keeping informed of the
activities of the corporation, general monitoring of a
Cs affairs and policies, and regularly reviewing
financial statements.
iv. DEL Causation If P establishes breach of DC, showing
overcomes presumption of rule & establishes prima facie case
of liability, even without showing of injury.
1. Burden shifts to Ds to show transaction was entirely
fair.
3. The Decision-Making Context
a.
4.
5.
3.
1.
f.
4.
5.
iv. This disclosure element, which brings the ALI in synch with
existing law of self-dealing, is the unique aspect of this law
g. Remedy: Directors holds the opportunity in constructive trust for the
corporation
i. Turns over her ownership and corp. will reimburse her for the
purchase price
h. DEs Corporate Opportunity Doctrine is set out in Guth v. Loft, Inc. (DE
1939)
i. Guth Test Standard: A corporate officer may not take a
business opportunity for his own if:
1. The C is financially able to exploit the opportunity
2. The O is within the Cs line of business
3. The C has an interest/expectancy in the O; AND
4. By taking the O for his own, the C fid will be placed
in a position inimical to his duties to C
ii. Defense: D/O may take the C O if:
1. C not financially capable
2. O was presented to D/O in his individual and not
corporate capacity
3. The C holds no interest or expectancy; AND
4. The D/O has not wrongfully employed the resources
of the C in pursuing/exploiting the O
iii. Analysis:
1. Is it a corporate opportunity?
a. Line of business test
b. Interest/Expectancy test
c. Note no factor is dispositive, look at
totality of circumstances
2. Is there an affirmative defense?
a. C has bypassed opportunity or ones like it in
the past?
b. Financial inability?
3. If it is a C O and there are no defenses, has the BD
approved or rejected the transaction?
The TX and DE tests are majority law
Ostrowski v. Avery
a. Facts: Small wheel manufacturer opens a separate company for
manufacturing small wheels while using the resources of the original
corporation and not disclosing to the shareholders that he was doing this.
b. Issue: (1) Is the majority shareholder a fiduciary (2) Is there the
existence of corporate opportunity?
c. Holding: (1): Yes majority shareholder owes a fiduciary duty (2) Used
the business purpose test and determined yes.
d. Avowed Business Purpose Test: (Majority rule) This is a
combination of a line of business tests and interest/expectancy tests:
i. Whether the business opportunity was one in which the
complaining corporation had an interest or an expectancy
growing out of an existing contractual right?
ii. Whether there was a close relationship between the
opportunity and the corporations business purposes and
current activities?
iii. Whether the business areas contemplated by the opportunity
were readily adaptable to the corporations existing business,
in light of its fundamental knowledge, practical experience,
facilities, equipment, and personnel?
e.
2.
vii. 3rd Claim: Sinclair set up a supply contract with Sinven where
Sinclair agreed to purchase all oil produced by Sinven.
Furthermore, Sinclair didnt comply with provisions requiring
them to buy a minimum and SInven didnt enforce:
1. Clearing SD Derived a benefit to the exclusion of
minority SH; furthermore caused Sinven not to
enforce its contractual right of min purchases
a. Getting on-competivie business from
Sinven which will greatly benefit their own
business
b. Apply Entire Fairness Tests:
i. Fair Dealing
ii. Fair price
viii. Rule: A self-dealing transaction between a controlling
shareholder and the corporation exists where the majority
receives a disproportionate benefit when compared to the
minority
Sale of Control
a. The General Rule: Controlling SH can sell shares at a premium and
keep profit for himself. It is understood that a part of the premium price
is the privilege of directly influencing the corporate affairs.
b. Zetlin v. Hanson Holdings, Inc
i. Facts: Z owns 2% of stock and majority owns 44.4%. In sale,
majority got more than double what Z received ($15 to $7) as
a control premium. Z sues because he think he has an equal
opportunity to share in the control premium.
1. Court states the Zetlin is wrong and tha tthe has no
right to control premium
ii. Rule: A controlling stockholder is free to sell, and purchaser is
free to buy, that controlling interest at a premium price
iii. Control premiums are justifiable because the purchaser is
acquiring control of the corporation. Benefits
1. Managers will do what you say
2. lowers agency costs and risk
3. Can replace management
4. Synergy with existing business
5. Self-dealing (legally)
iv. This is a property right of the majority and therefore, the
minority has no right to share in it
c. The Looting Exception. Exception to the Zetlin Rule
i. Standard: You cannot sell the corporation to a party that is
likely to loot the corporation, and if you do, the penalty is
draconian.
ii. Gerdes v. Reynolds
1. Facts: O/D and maj SH of RI control of C to Prentice
& Brady who looted $900K from C.
2. Rule: The sale of control in gross excess of the true
value may result in a breach of fid-duty where the
controlling SH fails to undertake a sufficient
investigation as to the purchasers motive and the
purchasers subsequently loot the corporation.
3. Factors which tend to indicate looting excessive
premium, excessive interest in liquid assets,
insistence on immediate possession of such assets,
and a lack of interest on how assets work.
d. Other Exceptions
i. Standard: You can turn over control of the board, but only if
you have control.
ii. A sale of control cant involve the conversion of corporate
opportunity.
v. Indemnification and Insurance
1. Standard: Analysis to decide whether a director can be indemnified:
a. Step #1 Was the person who was sued in their capacity as a director of
officer?
b. Step #2 Do any of these automatic bars play in? If no, move to the
next step.
i. Automatic Bar #1 Was act committed in bad faith?
ii. Automatic Bar #2 Was the act in a manner opposed to the
interest of the company?
c. Which category protects a director? 1459a, 145b, or 145f
i. 145(a) Permissive indemnification for 3rd party actions
1. Acted in good faith; AND
2. Acted in a manner not reasonably opposed to the
corporations best interest (not liable)
3. Very broad (officers, directors, agents, etc.)
4. Protects even if person(s) is guilty.
ii. 145(b) Similar indemnification provision for derivative
suits
iii. 145(c) mandatory indemnification provision if successful
on the merits for an (a) or (b) type claim (When they win,
even if on technicality)
iv. 145(f) a provision for 145(a) is not exclusive. How does
145a and f fit together?
1. Can give people additional rights beyond 145, but
can do anything that violates or is inconsistent with
145(a).
a. 145a sets out the outer limits of permissible
indemnification can add but can
contravene
v. 145(g) okay to buy insurance that indemnifies directors
even if you dont satisfy the terms of 145(a).
1. This is why 145f is read so narrowly. 245a trumps
145f,
vi. But even if a C can buy it, most insurance wont cover acts
that the D/O personally benefitted in the K.
2. Waltuch v. Conticommodity Services, Inc.
a. Facts: W was sued as an individual by the CFTC. He lost one of his
suits; provision says it will cover his legal fees regardless of good faith.
b. Issue: 145(f) if you read this to say that the Cs could write agreements
to indemnify under ANY circumstances, then the good faith requirement
of 145(a) would be meaningless.
i. How can 145a and 145f be read consistently?
c. Holding: The court reads 145f to say that you can do anything you want
by way of indemnification, provided it does not violate the whole of
145.
i. Example: you could have a provision in your COI that
REQUIRES indemnification allowed by 145, whereas the
language of the statute is permissive.
ii. Also, 145(g) says that if you buy insurance for your
directors, you can indemnify them for things that the statute
doesnt allow.
g.
d. Here, Waltruch did get his expenses paid for the other part of his suit b/c
he succeeded on the merits or otherwise.
Dissension in the Closely Held Corporation
i. Deadlock: Wollman v. Littman
1. Facts: P and D are 50/50 SH. D is now trying to steal the business. B/c the Ds
dont need the Ls anymore. But the Ls still need them. The Ds are seeking to
dissolve the corporation, they argue that this is justified b/c it would violate the
principals of equity.
a. Their plan is to dissolve the business and start up their own business w/o
the Littmans
2. Holding: Just as in Page v. Page, you cant dissolve the P-ship for the purpose of
stealing the P-ship from the other partners, you cant dissolve a corporation for
the purpose of stealing the corporation.
a. The board in this case is deadlocked via their irreconcilable differences,
hence the C is paralyzed
b. Court cant dissolve the business b/c that will give the bad party
exactly what they want.
c. What can the court do in this case?
i. Can appoint a custodian BD is completely displaced &
custodian has all power 226
ii. Can also appoint a provisional director sits has a tiebreaking vote on the boarddefinitely less harsh remedy.
353
3. In DEL, 273 is the only statute conferring court the affirmative authority to
dissolve a corporation applies where there are 2 SH each owning 50% on the
company
a. No other provision gives court same authority. DEL courts will use a
limited equity power to dissolve, but only in most extreme
circumstances b/c they want to be the least intrusive into corporate
affairs.
ii. Oppression
1. The Minority Shareholders Plight
a. How to Freeze-Out a Minority SH
i. Fire him from his officer/employment position
ii. Then, withhold dividends
iii. Deny him access to information by kicking him off the Board
of Directors
iv. Engage in self-dealing
v. Finally, offer to buy him out at a cheap price at a fraction of
what the stock is actually worth
2. Protecting Minority Shareholders from Oppressive Majority Conduct
a. Protection Through Contract
i. Standard: A min SH who is cognizant of the risks of
oppressive majority conduct could seek to protect his financial
and participatory rights by contract before committing his
capital to the venture.
ii. Nixon Standard: In DEL, closed corporations should make
protections through contract. This essentially means that the
court in DEL wont grant additional protections like
dissolution to protect them.
b. Protection in the Absence of Contract: Breach of Fiduciary Duty:
i. Donahue v. Rodd Electrotype: Old Standard in MASS, and
now only followed in CA Equal Opportunity
1. Facts: Rodd sold his stock back to the corporation for
800, Donahues argue it was an unlawful distribution.
Donahue own 20% and Rodds owns 80%. Donahues
c.
1.
2.
i.
iii. Deadlock
1. What is the greatest form of relief?
a. States like N think there are much wider remedies than just
compensatory relief. NY thins you should broaden the relief b/c Ps
shouldnt be forced to work with the Ds against their will, esp if
relationship has disintegrated b/t hem.
2. Disillusion standard: an equitable remedy (never mandatory) and if there is a
less restrictive remedy, then the corp. should not be dissolved.
a. Voluntary disillusion: not ordered or compelled by ct or state, you have
the right to do this if you comply with the following:
i. 275 what you need to do in order to have the right to
voluntary disillusion:
1. Get the approval of a majority of the BOD
a. The approval of a majority of all of the
outstanding shares of stock entitled to vote
2. 35 statute provides that a corporation can be
dissolved upon a specified event or at a specified
1.
2.
4.
2.
iv. Pay attention to the facts of the case and whether the award is
realistic for the circumstances
1. A minority SH who brings a disillusion action should
not receive less than he would have received had the
dissolution been allowed to proceed just b/c the
controlling shareholder wants to invoke the buy-out
remedy (Allied Corrugated Box Co.)
b. Brown v. Allied Corrugated Box Co.
i. Facts: Ps filled for involuntary disillusion of Allied, alleging
fraud, failure to pay dividends, unfair competition and excess
salary. The rule justifying a minority discount for lack of
control is mute in this case b/c intervenor Gerald Brown
already had control of the shares.
ii. Holding: Rule: A minority shareholder who brings an action
for disillusion should not receive less than he would have
received had disillusion been allowed.
c. Advanced Communication Design v. Follet
i. Facts: TC found the FV of Folletts shares to be 1/3 of the
value of ACD as an enterprise, w/o discounting for lack of
marketability (valued at 475K). ACD appeals, arguing that a
marketability discount should be applied to the valuation.
ii. Issue: Did court err in declining to apply a marketability
discount (ie, is the exception for extraordinary circumstances
met in this case? (yes).
iii. Holding: Min Ct adopts the ALI std re marketability discounts
for minority shares. Rule: no discount for marketability unless
extraordinary circumstances are present.
h. Securities Fraud
i. Security is a fungible, negotiable instrument representing financial value (including
stocks, bonds, and mutual funds)
ii. For elements of securities fraud see the section on Securities fraud for the elements, etc.
i. Fundamental Transactions
i. Certificate Amendments
1. Standard: 242 certificates may be freely amended subject to 2 broad
requirements:
a. An amended certificate may contain only such provisions as may be
lawfully contained in an original certificate of incorporation
b. If a change in the rights of shares or SH, or an exchange,
reclassification, or cancellation of shares or rights is to be made, the
provisions necessary to effect such a change must be set forth in the
amendment.
2. To amend the certificate, you must know 2 things:
a. The percentage of quorum
b. How to measure the vote
i. Three ways to measure the SH vote, depending on the statute:
1. Majority of outstanding shares
2. Majority of quorum entitled to vote
3. Majority of SH actually voting
ii. DEL majority of SH entitled to vote (50%)
iii. TX 2/3 majority of all shares entitled to vote (66%)
3. Shanken v. Lee Wolfman
a. Facts: Texas case. There was three classes of stock. They were going to
vote for increases of shares for each class. Class A & B voted for the
change, class C voted against. Class C didnt want class A and B to be
able to add shares without his vote.
b. Class voting S242(b)(2): you get a class vote if your class rights are
specifically changed.
i. You divide into classes to specify different rights per classes.
Here, they had differently weighted votes for BD voting.
c. When class voting is needed, there are two requirements TX & DEL
i. The certificate amendment must be approved by the requisite
% of shares entitled to vote
ii. Also approved by the requisite shares of each class entitled to
vote separately
iii. But look carefully at the class in question, may not need a
class vote.
d. Standard: You dont get a class vote unless your class rights are
specifically changed.
e. Holding of case: Court holds they could add shares without vote. Here,
the court differentiates b/t reorganizing and restructuring the stock,
which requires class voting, and merely increasing the number of shares
in the aggregate, which doesnt require.
i. Here there was no stock split, all the old shares stay the same,
doesnt change his underlying rights.
ii. Bylaws Amendments
1. Bylaws are typically adopted by the BD at the initial meeting of the board.
2. Standard: In DEL, the power to adopt, amend, or repeal bylaws is in the hands
of the SH entitled to vote. Or, BD might have the power if the power is granted
to them in the certificate of incorporation.
3. Keating v. KCK Corp
a. Holding: DEL Law, if bylaws are amended by custom and usage, that is
enough. Formalities arent required. The course of conduct is enough to
amend the bylaws and is just as good as following formal procedures.
i. Policy in CHC, formalities are almost never followed to the
letter, theres not general counsel watching every step
ii. Contra: Nixon v. Blackwell says that we should assume that
all CHC should have access to Ls and protect themselves.
iii. Certificate Amendments
1. Must be filed with the SOS, just as AOI b/c it is a publicly-filed document.
2. Different than amending bylaws which can be done by custom and practice,
not the same with AOI.
iv. Sale of Assets
1. Transactions Triggering Shareholder Rights
a. Sale of Substantially All Assets 217
i. Generally, DE 271 says that every corporation may sell all or
substantially all of its assets
ii. All or Substantially all:
1. Katz (DE) the sale of a companys Canadian
operations that comprised 51% of total assets and
45% of net sales, but which had been the only
profitable element of the enterprise for the last 2
years, met the test.
2. Hollinger (DE-2004) In an effort to return a plain
language interpretation, court refused to find a sale
within the meaning of S271 in which Hollinger sold
50% of its operation
a. It depends on how profitable remaining 50%
assets are
b. Approval: Requires BD approval as well as the vote of a majority of
outstanding shares
2.
3.
4.
i. Steps: 251
1. Preliminary agreement
2. Board AND vote of the majority of the outstanding
shares by both constituents
3. Filing of articles of merger
4. Stock of surviving corporation is exchanged for stock
of disappearing corporation
ii. In most agreements, authority is given to the boards to
abandon
iii. If SH approve, file merger agreement with SOS 103
iv. Consolidation: Identical to a merger except that constituents
fuse to form a new corporation
1. Triggers voting and appraisal rights in the
shareholders of both constitutents
b. Small-Scale Mergers: 251(f)
i. No S/H vote of a surviving constituent corporation required
unless forth in certificate if:
1. Agreement does not amend the certificate of
incorporation of the constituent
2. Each share of stock of the constituent is identical
post-merger
3. Surviving corporation neither issues stock OR
amount of shares to be issued does not exceed 20%
of total shares outstanding prior to effective date of
merger
c. Short-Form Merger: 253
i. Merger can be effected by a simple vote of parents board if:
1. Parent corporation is at least a 90% shareholder in
subsidiary
2. Bd. adopts a resolution to merge
3. Certificate of merger filed with the Sec. of State
4. Shareholders of subsidiary advised of 262 appraisal
rights, but no vote
5. Shareholders of parent are neither afforded an
appraisal nor are they permitted to vote because very
little change in investment; at worst, paying the 10%
minority to go away
d. Appraisal
i. In DEL, SH always have a right to appraisal in a merger, but
not for a sale of assets. 262(b)
ii. Exceptions to always having the right to an appraisal:
1. No appraisal rights for SH in surviving corporation
for a small-scale merger
2. No appraisal rights for SHs of parent corporation in
a short-form merger (but SH of the sub corporation
do have appraisal rights)
3. No appraisal rights for SH of a PHC based on
efficient market theory
e. De Factor Mergers
i. Two new kinds of combinations, stock-for-assets and stockfor-stock, trigger questions about how to characterize these
transactions: a purchase and sale of assets or merger?
ii. De Facto Merger: A theory which looks to the substance of a
transaction whereby one constituent sells assets in
consideration for shares of stock of the surviving corporation,
which would not otherwise trigger appraisal rights for the
In states that do accept the de facto merger doctrine, court adopts a 2-step
analysis. Farris v. Glen Alden
a. Has there been a sale of assets of one corporation in exchange for
securities?
b. Do the consequences of the transaction give rise to concerns for which
the merger statutes, which provide appraisal and voting rights, were
seemingly addressed?
c. Especially prevalent where the smaller company acquires the assets of a
larger corporation and the shareholders of the surviving company see
their influence and the value of their shares dramatically reduced
6.
Even where a SH vote is otherwise not required, might need a SH vote if:
a. Transaction requires amendment of certificate to issue more shares of
stock
b. Corporation is listed on the NYSE
v. Freeze-out Mergers
1. Freezeout: A corporate transaction whose principal purpose is to reconstitute the
corporations ownership by involuntarily eliminating the interest of minority
shareholders
2. Forms:
a. Dissolution Freeze-outs
b. Sale-of-Assets Freeze-outs
c. Debt Merger
d. Cash-out Merger
3. A minority shareholder in a publicly held corporation who is subjected to a
freezeout by the majority through a cash-out merger transaction has remedies in
both appraisal and BOFD
4. Even if the merger is fair, the transaction is invalid under Mass law if the
purpose of the merger is solely to eliminate the minority SH interest. (Coggins)
a. What we are debating is whether it is a property rule or a liability rule.
i. Is it a breach of fiduciary duty to get rid of a minority SH w/o
their consent? (liability view of shares Mass view
ii. Is it fair to get rid of minority SH so long as you give them a
fair price & fair dealing? (property view of shares De view)
b. Mass Test: Must satisfy both the legit biz purpose test & the entire
fairness burden
i. Was the merger for a legit biz purpose?
ii. Under the totality of the circumstances, was it fair to the
minority?
iii. BOP is on the controlling SH to prove that the transaction
does not violate fiduciary duties
iv. But even if it is fair, the transaction is invalid under Mass law
if the purpose of the merger is solely to eliminate the minority
SH interest.
c. DE approach: it is enough to satisfy the entire fairness test (fair dealing
and fair price).
i. Regardless of whether your sole motivation was to freeze out
the minority shareholders (eliminated the business purpose
test).
ii. No need to show a legitimate purpose for getting rid of the
minority SHs (Weinbarger case- the facts of this case were a
public corp, but still applies to closely held corps)
5. Dissolution
a. Grato v. Grato
i. Facts: Grato involved family trucking companies. Basically
transferred all the first 2 companys assets into a new
companywanted to get rid of mom & son, so didnt tell
them.. it was a fraudulent conveyance.
ii. Holding: Valuation of Ps interest in the biz should be based
on value of the biz as operated under the old corporate entitles,
just prior to the disillusion.
1. Why is this case different from Coggins (get present
value for stock)?
2. Here the minority shareholder got the FV as of the
date you were frozen out. Courts remedy here
implies that the courts remedy is consistent with DE
law, saying that there was nothing wrong with getting
rid of them per se, just that you should have paid
them FV as of the day you got rid of them.
iii. Cf: Mass: Even getting rid of them for the purpose of freeze
out is illegal (Cogginsso they get PV).
1. Note: Both of these cases are totally inconsistent with
Farnsworth (which says that so long as statutory
requirements are followed, its okay.
iv. It can be considered a breach of fiduciary duty freeze people
out even if you follow the statute (this can be accomplished 3
ways)
1. Cashout Merger
2. Dissolution (Grato-illegal disillusion)
3. Transfer of assets for the purpose of freezing out the
minority shareholder
j.
Derivative Suits
i. Derivative Suit: A suit by a minority SH brought on behalf of the corporation to enforce
a corporate cause of action against officers, directors, and 3rd parties
1. Extraordinary procedural complexity in order to minimize frivolous suits
2. As contrasted with direct action: Brought on a SHs own behalf either against
corporate fiduciaries or the corporation itself
3. Ask who would the relief benefit in this case? If it benefits individual = direct
suit. If it benefits corporation = derivative suit.
ii. Procedural Requirements:
1. Standing: A SH must at time action is begun and during the pendency of the
action
a. A SH may lose standing when his corporation merges with another
during pendency of action
b. Creditors ordinarily have no right to bring a derivative suit unless a
corporation is insolvent
2. Personal Defenses: Corporate defenses which bar a SH from bringing a
derivative suit due to factors not related to the merits of the action
a. A SH is barred form bringing a DA if she:
i. Participated in the wrong, consented to the wrong, acquiesced
in the wrong by failing to object
b. Tainted Shares Rule: the transferee of a SH who is barred from bringing
a DA due to a personal defense is also barred
3. Corporation is a defendant in a lawsuit for purposes of establishing diversity.
iii. Direct v. Derivative Suits
1. Barth v. Barth
a. Facts: Minority SH sues President and Corporation for actions,
involving self-dealing, which reduced value of shares.
b. Holding: In some jurisdictions, in the case of a CHC for suits against the
majority, the court has the discretion to allow a direct action against the
corporation, even if it is technically a DA, if to do so would not offend
the policy rationale for requiring DA including:
i. Protecting creditors of the C
ii. Limiting a multiplicity of suits against the C
iii. Ensuring a fair distribution of proceeds if the P wins
c. This is the law in Texas: if a company has over 35 SH, court has
discretion to treat DA as a direct.
2. DE doesnt allow this type of judicial discretion cant look behind effect on the
shares to the effect on the shareholders.
3. Distinguishing Classic Suits:
a. Derivative Wrongful act that depletes corporate assets: Self-dealing,
breach of duty of care, excessive compensation, corporate opportunity
usurped for D/Os own benefit
2.
1.
1.
IV.
Rule: Today, in most states you need court approval to settle a derivative action
and the court must approve the terms as fair, just and reasonable
a. Rationale: Derivative suit, he brought it on behalf of the company and
any relief should benefit the stockholders in proportion to their
ownership
2. For derivative suits that take place in federal courts, FRCP 23.1 requires court
approval and notice of the proposed dismissal be given to shareholders and
members
3. Desimone: 4-Part test to determine if settlement should be approved.
Burden on proponent
a. Settlement reached at arms length negotiation
b. Proponents are counsel experienced in similar cases
c. Sufficient discovery to enable counsel to act intelligently, and
d. Number of objectants or their relative interest is small
4. Settlement without Plaintiffs Consent
a. Under Wolf v. Barkes (2nd Cir.), no judicial approval for settlement
directly between director and corporation in a derivative action
i. Rationale: FRCP 23.1 requires court approval for settlement of
a derivative suit rather than a settlement of the claim
b. But, once you settle the underlying claim there is no suit left
c. Shareholders may still sue for lack of fairness if board was interested
d. Thus, this is a controversial holding. Many jurisdictions say you can't
settle claim that underlies derivative suit without courts permission.
i. But, in every jurisdiction in country, bd. can do whatever it
wants b/f the suit is filed; thus, why can't they do this after suit
is filed?
The Limited Partnership
a. Introduction
i. LP, like a corporation is a creature of statute it can only be created by complying with
formation requirements of statute.
ii. A partnership formed between 2 or more persons comprised of at least 1 General Partner
(GP) and at least 1 Limited Partner (Lim P)
1. GP, like in general p-ship, has unlimited liability for obligations of firm.
a. Where a corporation is the GP, then the LP could enjoy nearly no
liability due to principles of corporate law.
2. Lim P typically enjoys limited liability - has no liability for debts of venture b/y
loss of investment.
a. Can forfeit limited liability if there is too much control by LP.
b. Historical Overview
i. Uniform Limited Partnership Act (ULPA) first adopted in 1916 by all states
ii. Then, it was revised in 1985 and entitled RULPA
iii. Further revised in 2001 ULPA (2001) however, only 9 states have adopted, so for
purposes of our class, RULPA 1985 will be considered our law.
c. Statutory Linkage & De-Linkage
i. LP statutes are typically linked to G P-ship statutes.
1. ULPA G P-ship law applies to LP issue when that issue is not covered by the
LP statute.
2. However, 2001 ULPA is completely confined.
d. Formation
i. General Requirements See RULPA 101(2), 102, 104, 201, 204, 501
1. Unlike G P-ships, LPs can only be formed by filing certificate of LP with SOS.
See RULPA 201.
a. Certificate is skeletal document which includes only basic information
name & identity of GPs.
b. Purpose is purely to provide notice to third parties.
2. Tax Benefits
a.
b.
e.
f.
g.
h.
Financial Rights & Obligations. See RULPA 101(2), 501-4, 601, 604, 607, 608
i. LPs, by contract, can do what they like. Typically GP will have small financial interest
and the LPs will divide up the rest in proportion to their capital interests.
ii. If the partnership agreement is silent, above default rules will then apply.
iii. RULPA spells out various default provisions, including: 503 & 504 state that, unless
contract says otherwise, profits, losses, and distributions of a LP shall be allocated on the
basis of the value of the contributions made by each partner.
Entity Status. See ULPA 104
i. Standard: LP as an entity, possess a number of characteristics that suggest separateness
between the partners and business itself.
ii. Under RULPA, LPs possess limited liability (LL) for obligations of the business, LPs
can bring derivative suits on behalf of the LP, and the dissociation of a partner doesnt
necessarily result in dissolution of LP.
1. Courts generally treated LPs as legal entities distinct from owners.
iii. Currier v. Amerigas Propane, L.P.
1. Facts: Defendant LP comprised of GP Amerigas & LP, Amerigas Partners, LP.
Plaintiff was employee of the GP at time of injuries and he received workers
comp under policy owned by GP. Here, the whole LP is saying that they are the
plaintiffs employer, and thus, under workers comp, you cannot sue your
employer.
2. Issue: Even though plaintiff works for GP, is the LP the employer or not?
3. Holding: The Court says the LP is immune from suit b/c they are the employer.
Does this mean the LP is essentially the same as the LP?
a. Underlying policy reason of workers comp GP is running the
business of the LP. If you can sue the LP after you receive benefits
from GP, GP will be liable for obligations of LP. GP will ultimately be
held liable notwithstanding workers comp
b. Bottom Line just b/c LP is considered a separate legal entity; you
must view it under the present set of facts & policies.
Limited Liability Most Important Question of LPs ****
i. The Evolution of the Control Rule
1. Standard - Limited Ps have no liability for the debts of the venture b/y the loss
of their investments. LPs can lose their LL protection if they participate in the
control of the business. Notice the evolution of the control rule below with
each subsequent version of the LP statute, the rule has b/c progressively more
protective of limited partners.
a. ULPA 1916 A limited partner is not liable unless he exerted control
over the corporation.
Merely engaging in control was enough to cause Lim Ps to
lose their limited liability.
b. RULPA (1976) A Lim Ps control will subject him to liability for
the obligations of the P-ship were such control is:
i. Substantially the same as a general partner OR;
ii. If not substantially the same, then 3rd party must have had
actual knowledge of your controlling activity
1. Rationale If you represent to others you are in
control, then the creditor may be misled into thinking
you are GP.
c. RULPA (1985) A Lim Ps control of the business will subject him
to liability for the p-ship obligations when:
i. There is control; AND
ii. Reasonable belief by creditor; AND
iii. Based on conduct of the limited partner that he is a general
partner the source of the belief is the Lim P
d. ULPA (2001) Lim Ps are simply not liable for debts of LP
2.
3.
i.
Fiduciary Duties
i. General Partners. See RULPA 107, 305, 403, 1105
1. Standard: A corporation can be a general partner in a limited p-ship is subject
to the control of somebody else though. (i.e., directors of the corporation)
2. There are certain situations where a director/officer of the corporate general
partner can be held liable for the debts of the LP may personally owe fidduties to the Lim Ps and the LP.
a.
3.
4.
5.
a.
2.
j.
k.
a.
V.
VI.
W/drawing P is entitled to receive any distribution provided for in Pship K. If silent, a P shall receive, within a reasonable time after
leaving, the fair value of their interest in LP as of the date of
withdrawal based upon their right to share in distributions of LP.
2. Family Limited Partnership (FLP)
a. Estate planning device involving a business owner who creates a LP
w/family members as Lim Ps
i. Goal is to transfer the business to family members while
minimizing estate & gift taxes
ii. Dissolution See RULPA 801-4
1. Standard: Under 801, LP is dissolved when:
a. At the time specified in the certificate of LP;
b. Upon occurrence of events specified in P-ship K;
c. Upon the written consent of all Ps;
d. Upon an event of withdrawal of GP under 402; and
e. By the entry of a decree of judicial dissolution under 802 (court may
do this whenever it isnt reasonably practical to carry on business in
conformity with P-ship K.
2. Obert v. Environmental Research & Development Corp.
a. Facts: Lim Ps brought action against GP ERADCO and its owner.
RULPA 801 See above for specifics of statute. P-ship agreement
only provides provisions for voluntary reasons for dissolution but
here, it is involuntary. The GP has been removed.
i. All Lim Ps have to consent to substitution of GP when no
other GP remains, whether there is an agreement to the
contrary or not.
b. Standard: If a LP removes a GP, the LP can continue under two
circumstances:
i. If there is another GP and its okay to continue per the P-ship
agreement;
ii. If only 1 GP, then the LP will be dissolved unless agree in
writing within 90 days to appoint new GP in an unanimous
vote
c. Holding: Here, dissolution occurs, because no GP remains (see #2)
following the removal of GP, if there has been no unanimous approval
of a sub GP within 90 days.
The Limited Liability Partnership
a. Brief Overview
i. First started in Texas; LLPs are general p-ships, with one core difference & one ancillary
difference
1. Core Difference liability of GPs of an LLP is less extensive than the liability
of a GP in an LP
a. Not liable to an unlimited extent; you are responsible for your own
misconduct and those you are responsible to supervise only (popular
among attorneys)
2. Ancillary Difference LLPs must be registered with the appropriate state office,
they are creates of statutes and can never be formed by accident
a. Some states limit what types of organizations can hold LLP status
The Limited Liability Corporation
a. Historical Overview
i. Combines elements of corporations & p-ships. They are relatively new & were first
created in Wyoming only about 15-16 years ago.
1. Corporations owners of LLC enjoy limited liability & entity status
2. Partnerships members have great freedom to structure internal governance by
agreement
ii. Since it is such a new creature, there is much uncertainty & relatively few case law out
there.
iii. Since there is no state uniformity on the law that is used, for our class we will treat
DLLCA, common law, and principles of P-ship & corporate law as our law
1. DLLCA contains few default provisions
iv. Bottom line there will always be dispute as to how to treat an LLC when P-ship &
corporation law conflicts
1. Look at the underlying policy or aspect involved. Where the characteristic
originated from the P-ship aspect, use P-ship laws same for corporate law.
b. Formation. See DLLCA 18-101(3), (7), (11), 18-102, 18-104, 18-201, 18-301, 18-901
i. Standard: LLC is formed by filing an articles of organization is a designated state office
can usually be formed by a single person skeletal document:
1. Usually contains name of LLC, address, address of agent, purpose of LLC,
names of initial managers/members depending on management, duration of LLC
2. Real detail on governance of LLC is contained in operating agreement.
c. The Role of Contract See DLLCA 18-101(7), 18-1101
i. Operating Agreement (OA)
1. Non-public agreement among members concerning LLCs affairs
a. Similar to corporations by-laws & P-ship agreement
2. Provides for governance, capitalization, admission and withdrawal of members,
and distributions
3. Standard: Generally, OA can be tailored to suit the particular needs of LLCs
members & its provisions will displace most if not all of the default provisions
in the statute
a. Freedom of K is central theme of LLCs so, very important to draft
OAs well few default provisions are out there to use
b. The parties OA is often only supplier
4. The role of Agency
a. In DEL: Unless otherwise provided in the OA, each member &
manager has the authority to bind the LLC
i. Odd thing OA is not a public document, but it can still limit
apparent authority.
ii. Elf Atochem North America, Inc. v. Jaffari
1. Facts: Jaffari, president of Malek, Inc. designed an alternative to a current
product in market; Elf approached him and proposed investing. They created
Malek LLC with OA and registered with SOS.
a. Elf sued Jaffari and LLC individually & derivatively on behalf of Malek
LLC seeking equitable remedies. Alleged 4 things:
i. Jaffari breached his Fid-duties
ii. Pushed Malek, LLC to brink of insolvency by withdrawing
funds for personal use
iii. Interfered with business opportunities
iv. Failed to make disclosures to Elf
v. Threatened to make poor quality maskant and violate
environmental regulations
b. Elf argues that TC failed to classify its claims as derivative & that the
arbitration clauses of the OA are invalid under 109(b) o which prohibits
parties from vesting exclusive jurisdiction in a forum outside of
Delaware.
2. Policy of DEL Act: modeled after the LP Act basic approach is to provide
members with broad discretion in drafting the OA and to furnish default
provisions when OA is silent.
a. 18-1101(b) its the policy to give the max effect to the principle of the
freedom of K and to the enforceability of LLC agreements
e.
f.
g.
Financial Rights & Obligations See DLLCA 18-5-2 to 504, 18-601, 18-607
i. Standard: LLC statutes tend to provide either P-ship like equal allocation or
corporate/LP like pro-rata allocation based upon contributions to firm but remember
members can always contract around default provisions in statute!
1. Member typically establish capital accounts like Ps in P-ship
ii. Five Star Concrete, L.L.C. v. Klink, Inc.
1. Facts: Kink and 4 other concrete corporations formed LLC. Klink contributed
12.5% of initial total capitalization & issued 12.5 ownership units. Klink later
notified LLC in writing of its intent to withdraw did so correctly statue says
must give 30 days written notice.
a. At end of year, Link allocated $31,889.02 in income its share of the
LLCs profits in the 10 months it was a member. However, it never
received that in distribution, only issued for determination of Klinks tax
liability.
b. Klink didnt get the money, just had to pay taxes on it.
2. Klink argues that when theres an allocation of income to members for income
tax purposes that creates an automatic legal right to receive distribution in
amount of that income even if member is withdrawing.
a. However, the act and the agreement do not say that both the OA and
act are silent in regards to timing & amount.
3. Holding: Allocation of profits for tax reporting purposes did not provide Klink
with a legal right under either the Act or OA to receive a distribution in the same
amount.
a. Unfair? Better drafting next time.
The Nature of the LLC: Regulatory Issues
i. Since other substantive law tends to focus on only P-ships or corporations, this leaves
considerable uncertainty whether new business forms fall within the statutory coverage.
ii. Meyer v. Oklahoma Alcoholic Beverage Laws Enforcement Commission
1. Facts: This was an appeal from a declaratory judgment from the ABLEC that a
newly-created LLC was not entitled to receive and hold a retail package store
license for selling liquor.
a. Oklahoma constitution prohibits giving licenses to corporations,
business trusts, and secret P-ships (??)
b. However, LLC Act authorizes LLCs to conduct business in any state for
any lawful purpose, except banking & insurance.
2. Holding: The Court holds that the constitution prohibits an LLC from receiving
a license to sell liquor.
a. The Court reasons that since only individuals and P-ships could obtain
license, the fact there could be personal liability and responsibility in
this area was a very important public policy
Entity Status See DLLCA 18-201, 18-701
i. Under most LLC statutes, LLC is explicitly characterized as separate legal entity whose
identity is distinct from that of its owners can exercise rights & powers in its own name.
(like corporation)
ii. Premier Van Schaack Realty, Inc. v. Sieg
1. Facts: Premier is trying to enforce a brokerage fee payment provided in a
Listing K it entered into with Sieg to sell a piece of property. Premier introduces
Sieg to DVJ, who offered to purchase but deal fell through. DVJ & Sieg decide
to form LLC and the OA said Sieg would convey property to LLC Sieg would
receive 40% interest and future profits.
a. Premier wants its commission, but TC granted MSJ claiming transfer
was not a sale or exchange per the agreement b/c it lacked consideration
2. Holding: Where a person retains substantial interest in property they continue to
assume the risks of an investor instead of the risk of a seller Premier didnt get
its commission.
a.
Ragazzo: Thinks the court is saying stuff that is simply not true (no
consideration, separate legal entity, etc.) but thinks that this is a kind of
sale/exchange that the listing K does not cover
b. Note: In deciding to apply clause of contract, you have to see if the LLC
fits within it. Some LLCs would, others do not. Must look at the
underlying body of law that matters.
h. Limited Liability
i. Standard: Generally, the LLC provides its owners with Limited liability for the ventures
obligations
ii. The Scope of Limited Liability See DLLCA 18-215, 030, 607
1. Pepsi Cola Bottling Co. v. Handy
a. Facts: Pepsi bought property from Willow LLC. Handy was
officer/director/SH of Handy Realty also member of Willow Ginsburg
and McKinley also members of LLC.
i. Handy, on behalf of LLC, purchased piece of property to
develop. However, he learned that it contained wetlands which
adversely affect the value & development potential
ii. So, LLC decided to sell property without disclosing that the
property contained wetlands.
iii. Bought property for $175K and sold it to Pepsi for $455K
outright lied to Pepsi about the wetlands designation.
b. Issue: Can the other LLC members be liable for Handys fraud? Should
they be shielded from liability simply for using LLC?
i. LLC is the entity that actually sells property to Pepsi
ii. LLC committed fraud but members have protection, but not
from personal liability
1. When an individual commits fraud, they are all
personally liable for that bad act.
2. LLC was formed AFTER the fraud but still a
general p-ship and all jointly & severally liable.
iii. What if the LLC pre-dated the fraud? Always remember still
personally liable for your own torts.
1. Note ***Before piercing the veil, always ask whether
someone personally did something wrong and then
they will always be held liable.
c. Holding: If a person makes material misrepresentations to induce a
purchaser to purchase a parcel of land at a price far above FMV, and
thereafter forms a LLC that person cannot claim that his status as LLC
member protects from liability to purchaser under 18-303
2. Water, Waste & Land, Inc. v. Lanham
a. Facts: Lanham and Clark were members of PII, LLC. Clark contacted
WWL about hiring them to develop a project. He gave him his business
card all it said was PII nothing else that may have given rise to LLC
status.
i. Westec was told to begin work; they did and were never paid.
b. Issue: Whether members/managers of LLC are excused from personal
liability on K where the other party to the K didnt have notice that they
were negotiating on behalf of LLC at the time K was made?
i. LLC Act provides that articles of organization provides
constructive notice to 3rd parties about LLC status
ii. However, law of agency also applies
iii. Using the word PII is simply not enough!
c. Holding: Using agency law, agent is liable on K entered on behalf of
principal if the principal is not fully disclosed. The agent who negotiates
a K with a 3rd party can be sued for any breach of K unless the agent
i.
discloses both the fact that he is acting on behalf of principal and the
identity of principal.
i. 3rd party with whom agent deals with has no duty to discover
existence of or identity of principal.
ii. Clark and Lanham did not identify their LLC identity or
existence.
iii. Piercing the Veil See DLLCA 18-303
1. Kaycee Land & Livestock v. Flahive
a. Facts: Kaycee leased the surface rights from Flahives LLC & later they
found the LLC had contaminated the surface. LLC has no assets &
Kaycee wants to pierce the veil & hold FLahive personally liable.
b. Issue: Whether, in the absence of fraud, the entity veil of an LLC can be
pierced? Question whether to treat this like a corporation veil-piercing
case or not.
i. Court decides to look to corporate alter ego theory for veil
piercing.
c. Holding: Court determines that there is no reason to NOT extend the
veil piercing CL for corporations to LLCs.
d. Standard: If members & officers of an LLC fail to treat it as a separate
entity as contemplated by the LLC statute, they should not enjoy
immunity from individual liability for the LLCs acts that cause damage
to third parties.
i. Not just for cases of fraud the court has to look at all the
circumstances, just like in corporate veil piercing actions
e. Bottom Line every time an issue comes up under this form of entity,
you are going to have to fight the battle of whether to follow p-ship law
or corporate law.
f. Texas rule Generally not allowed in LP context, one advantage that
LP has over the LLC
i. It is easier to pierce LLC veil than corporation
ii. Late 80s Texas passed many anti-veil piercing statutes, absent
actual fraud, cant pierce
iii. When attempted to apply same in LLCs, much debate and it
is not allowed.
iv. Bad result: LLC should either have more protection or at least
be same as corporation.
Fiduciary Duties See DLLCA 18-406, 1101
i. Standard: In jurisdictions where fid-duty is not addressed by statute, courts have a
greater role in shaping the contours of fid-duty without legislative aid
ii. VGS, Inc. v. Castiel
1. Facts: Castiel is the major shareholder who has fallen out with another LLC
member. Castiel is using his controlling member status to direct funds to his
particular branch of the LLC. 3 managers of LLC are Castiel, Sahagen, &
Quinn.
a. Quinn was appointed by C, but S able to persuade him that they needed
to get rid of C.
b. Q & S merged LLC into corporation, but did so without notifying C.
2. Issue: Lack of notice meant that Q & S failed to discharge their duty of loyalty
in good faith? Do members owe duties to one another?
a. Yes even though this is DEL case, in their capacity as managers, Q &
C owe duty to one another by analogy to p-ship law. . . i.e., punctilio of
an honor of the most sensitive.
b. They did it secretively, didnt give him notice.
i. But see 18-404Id) could do so without vote or meeting if they
have written consent of majority, which they did.
3.
iii.
iv.
v.
vi.
The Court wanted to look at this particular case as more than one involving the
duty of members to one another, rather than duty of manager to one another.
4. Holding: Almost reasonable expectations test: Managers have fid-duty to
members as well as to LLC as a whole. But compare to DEL case of Nixon v.
Blackwell
a. DE LLC easiest state to establish duty directly to other members,
while complete opposite in corporate context.
5. Bottom line LLC is still developing constantly analogizing
McConnell v. Hunt Sports Enterprises
1. Facts: LLC formed with the goal of pursuing NHL franchise, but Hunt refuses
lease deal & McConnell (member of LLC) decides to accept deal on his own.
2. Hunt says that McConnell breached duty and undercut his negotiations
usurped LLC opportunities.
3. McConnell claims LLCs OA allows this to compete with one another.
Specific language says that members may compete with one another for any
other business. It all boils down to what is meant by other.
4. Rule/Holding: While LLC cant disclaim fid-duty of loyalty owed by members
to one another altogether, they can redefine it by contract.
a. Ragazzo: This should have been a jury fact question. Other business
could mean so many different things.
b. Remember that in DEL, you can contract away ALL of your fid-duties in
a LLC. 18-1101 clearly says you can modifiy, restrict, or eliminate fidduties like in LPs.
i. Most states wont allow this, so be CLEAR in drafting
operating agreements!!
Anderson v. Wilder
1. Facts: Dispute between members of Futurepoint LLC. Plaintiffs were expelled
from the LLC by a vote from the Ds who owned majority. Ps say Ds violated
their fid-duty of good faith. They received a buyout price of $150 per unit and
then Ds turned around and sold those shares for $250 per unit.
2. LLCs OA: Company may expel member with or without case upon vote or
written consent of members who hold majority. Remaining members shall be
obligated to purchase those shares.
3. Issue: Why would this be considered in bad faith if it the parties clearly
contracted for this? Isnt this what the minority actually bargained for?
a. Implied limitation for an ouster clause
4. Holding: Fid relationship exists between members of either P-ship or closely
held corporation under established principles of both P-ship law and corporate
law.
a. Members owe each other obligation of utmost good faith & integrity in
their dealings with one another and with regards to their P-ship affairs.
Some LLC statutes that address fid-duty indicate that members (in member-managed
LLCs) and managers (in manager-managed LLCs) owe fid-duties to the individual
members as well as to the entity itself.
Barbieri v. Swing-N-Slide Corp.
1. Facts: A director & several officers of corporation form LLC to act as one of
two GPs in a GP that then makes a tender offer for the corporation.
2. Issue: Whether a claim for breach of fid-duty may be stated against the LLC
and/or the Gen P-ship by SH of corporation?
3. The Court focuses on the composition of the several entities involved in the
transaction.
a. Holdings, the offeror/acquirer, is DE Gen P-ship
i. Two partners Management & Green Grass Capital LLC
owned and controlled by parties unrelated and unaffiliated by
SNS
ii. Management organized by
4.
l.
2.
3.
4.
VII.
m. Final Thoughts
i. LLCs are definitely the wave of the future as far as closely held business go there is no
GP, everyone has limited liability, and having too much control will not hurt you.
ii. Why would anyone choose to conduct a closely held business in a non-LLC form?
1. Differences in fees & franchise taxes
2. The relative complexity of the LLC
3. Attorney and business owner inertia
4. Sparse case law relatively new lots of uncertainty
5. Lack of exit rights
a. The desire to go public
b. Ease of reorganization
6. LLC statute doesnt solve a lot of problems doesnt have too many default
rules and there are still several potholes that members can fall into.
a. If you dont fill in these statutory gaps by anticipating them in the OA,
you are in LLC Limbo, not likely in other entities
i. May all be worked out over time though?
Public Corporations
a. Insider Trading
i. Insider trading means a person has used information acquired by way of position in a
company, about that company, to trade securities for personal gain.
ii. The Common Law
1. Goodwin v. Agassiz
a. Facts: P sold his stock on the Boston stock exchange, It was bought by a
director & general manager of the company.
i. The insider information was an experts report that suggested
prior negative reports on mining potential of
b. Standard: Under common law, insider trading is not common law fraud
(majority) though a substantial majority holds it as fraud. Therefore,
insider trading is legal.
i. However, USSC has created special facts exception
whereby it would be a CL fraud. Exceptions include:
1. Fraud (includes false statements/half-truths)
2. Fraudulent concealment
3. Special facts even if director has no general duty to
disclose, there are cases where, by reason of special
fact, such duty exists.
c.
However, Securities Exchange Act has since been passed and CL has
been frozen.
2. Elements of Common Law Fraud (state law):
a. Lie
b. Material
c. Scienter
d. Reliance
e. Loss Causation
f. Damages
b. Federal Regulation
i. Introduction
1. Three main goals of security regulations are:
a. Get information to investors
b. Make sure it is complete and truthful
c. Regulate the market, to an extent. (this is what we will focus on)
2. One of the purposes of the Federal Security Regulations is NOT to referee the
fairness of transactions that is a state law concern.
3. Securities fraud actions dont always have same elements. There are also
standing issues as to who can be a P and which Ds you can sue.
4. We study securities regulation in this class b/c it deals with violations of fidduties that arise from corporate law.
ii. As a matter of policy should insider trading be illegal?
1. There is less risk when you trade in market if there are rules against insider
trading. If we permitted insider trading, it would raise every companys cost of
raising capital (require greater return of raising risk)
2. Should it be legal? Argument that good things come from it. Insiders b/c more
involved in their companies and the market responds appropriately when they
trade. (Minority position)
iii. Summary of 10b 5 - always focus on who is lying on why it matters, you cant reach
other issues without that first.
1. Standard: Rule 10b 5 it is UNLAWFUL for any person, directly or indirectly:
a. To employ any device, scheme, or article to defraud
b. To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading, or
c. To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any personin connection with
the purchase or sale of any security.
d. Elements of a 10b 5 claim include(similar to CL fraud):
i. A lie
ii. Thats material
iii. Scienter (either knowing or reckless)
iv. Reliance
v. Loss causation
vi. Damages
e. ***Set out exam answer by the elements & address each in turn!
iv. True Insiders See 15 USC 78j(b), 78u-1, 17 CFR 240, 10b-5
1. SEC v. Texas Gulf Sulpher Co.
a. Facts: The defendant directors bought stock in droves based on an
insider report that suggested they were going to hit a big mine strike.
b. Issue: Silence is normally not considered a lie unless there is a duty to
disclose. Did these directors have a duty to disclose?
c. Standard: The duty may come from the federal policy of making the
market a level playing field, or perhaps from state law. A pure omission
is not a lie unless there is a duty to disclose.
i. There is a duty to disclose this information (fed)
2.
i. Therefore, the printer gets off the hook even though he did
something bad. It also allows people to do a lot of trading that
should be prohibited.
ii. Here, the court says the duties to disclose come from state
law, instead of fed securities law.
iii. Had they said it came from fed, you could find the duty b/c it
is the policy of the SEA to protect the integrity of the market.
e. Standard: A duty to disclose does not arise merely from possession of
non-public market information; there must be a specific duty to the
company or SH.
v. Tippers and Tippees
1. Dirks v. SEC
a. Facts: D is a trader and he gets a call from a former board member
telling him there is fraud going on at a Company by misstating the value
of assets. The information had previously gone to the news, insurance
commission, and SEC, but they all dismissed the claims.
i. D investigates and discovers that claims are true, so he calls
all of his buddies and they sell their holdings in the company.
When that happens, SEC becomes concerned
b. D charged with 10b5 violation by SEC
i. SEC wants rule that states where tippees come into possession
of confidential material information from an insider, that the
tippee steps into the shoes of the insider.
1. This rule would make this case easy because the
tipper directors had fid-duty to corporation and did
not publicly disclose.
2. But the court rejects SECs rule here
c. Issue: Whether D can be liable in light of the fact that he holds no duty
to the corporation b/c he is an outsider?
d. Standard (Tippers Doctrine): The Court reiterates the Chiarella rule
that absent a duty to disclose, trading on non-public information will not
violate 10b5.
i. Test: A tippee is liable for insider trading when:
1. The tipper has breach a fid-duty in passing along the
information
2. The tipee knows or should know that the tipper
breached his duty
3. The tipper gains from the relationship
a. Payment
b. Reciprocal relationship
c. Tippee is a friend or relative
e. Holding: The USSC that D is not liable because S didnt gain anything
from making the tip, thus, there is no liability.
f. Under the Tippers Doctrine, lets apply test here:
i. Did S breach a fid-duty in telling S? No, not seeking to make
any money, just wants public to know fraud
1. But argue yes- he hurts his cos SH
2. So, probably fid-duty breach
ii. But D didnt gain anything nothing pecuniary
g. Standard (Quasi-Insider Doctrine): Confidential information received
in the course of a fid relationship (such as lawyers, accountants, etc.)
cant be traded on.
h. Bottom Line USSC is willing to use federal law to base this duty on,
but still not ready to make the full leap to basing the entire duty of
disclosure on federal security laws
i. Consis
a.
2.
3.
4.
5.
2.
3.
g.
c.
1.
ii.
iii.
iv.
v.
vi.
vii.
a.
3.
4.
5.